Foreign exchange option (also called FX option or currency option) is a derivative financial instrument that grants the owner the right but not the obligation to exchange money denominated in one currency into another currency at a pre-agreed exchange rate on a specified date. There are 2 types of options: call (the right to buy) and put (the right to sell) foreign exchange at a fixed date and price.

As in the "Black-Scholes option price model" for stock options, the value of a European option on an FX rate is also calculated by utilizing Black-Scholes model following a log-normal process. There are 6 inputs required in the Black-Scholes option valuation model: